Is a Reverse Mortgage Right for You? Key Facts and Considerations

With inflation driving up costs, many seniors face challenges in managing monthly mortgage payments and covering household expenses. For people who own their homes or have significant equity, reverse mortgages can be a potential solution to their economic hardships. 

Reverse mortgages allow seniors to get rid of their monthly mortgage and receive funds either monthly or as a lump sum payment. It is a great option for seniors who are struggling financially but wish to age in place. This article discusses everything about reverse mortgages, including the different types, how they work, as well as the pros and cons. So, let’s get started.

What Is a Reverse Mortgage? 

A reverse mortgage allows homeowners aged 62 and older to borrow money each month from a lender, using the equity in their home as collateral. Equity is defined as the difference between the home’s market value and the remaining balance on the mortgage.

The amount of money the homeowner receives every month or as a lump sum is based on:

• The value of the house
• Interest rates
• The loan term
• The loan type
• The homeowner’s age

Are You Eligible? 

To receive a reverse mortgage loan, you must meet the following criteria: 

• You are at least 62 years old.
• You hold a considerable amount of equity in your home.
• Your home is your primary residence.
• Your home is in good condition.

How Does a Reverse Mortgage Work? 

In a reverse mortgage, a portion of your home equity is paid directly to you every month or as a lump sum by a lender. The amount paid is usually 40% to 60% of your home value.  

The funds have to be paid back to the lender after:

• The homeowner dies or permanently moves out of the house.
• The homeowner transfers or sells the property to someone else.
• The homeowner stops paying insurance or property taxes.
• The homeowner neglects the loan terms.

Reverse Mortgage vs Traditional Mortgage 

The differences between a reverse mortgage and a regular mortgage are discussed below: 

Reverse Mortgage 

In reverse mortgages, the borrower or homeowner does not have to make any monthly payments. Instead, they receive some amount of money from the lender every month, or receive a lump sum payment. The borrower is also allowed to live in the house until they die or move out.

They can choose to repay the loan at any time, or their heirs can repay it after the homeowner passes away or moves out.

The loan is usually paid back by selling the house or transferring the property’s ownership to the lender. 

Traditional or Forward Mortgage

In traditional or regular mortgages, the borrower has to pay funds to the lender every month, which can be challenging for many retirees. 

Moreover, if the homeowner fails to repay the money, the lender has the right to take their property even if they live in the home.

Types of Reverse Mortgages 

There are three main types of reverse mortgages: 

Single-Purpose Reverse Mortgages 

A single-purpose reverse mortgage is the least expensive type, as it is offered by the government or non-profit organizations. Organizations that offer this type of reverse mortgage include state and local governments, local non-profits, credit unions, and banks. However, this type of loan is not available in every state. 

As the name indicates, a single-purpose reverse mortgage doesn’t involve monthly payments; instead, a single, one-time lump sum is given to the borrower to cover a particular expense, such as home repairs or property taxes.

Federally Insured Reverse Mortgages 

Federally insured reverse mortgages are also known as home equity conversion mortgages (HECMs) and are funded by the federal government. Federally insured reverse mortgages include lower fees and interest rates and are mainly designed for homeowners with low to moderate income. 

There are several payment options to choose from:

• A one-time lump-sum payment
• Fixed monthly payments for a lifetime 
• Fixed monthly payments for a set time (e.g., 15 years)
• Access to funds only when needed

Proprietary Reverse Mortgages 

Proprietary reverse mortgages are given to homeowners by private organizations or lenders like banks, companies, or other financial institutions without any government support. They are typically designed for people whose homes have higher values and who wish to tap into their equity to receive payments. 

Proprietary reverse mortgages are not federally insured and may not be available for people with low or moderate income. It includes options for regular monthly payments, a one-time lump-sum payment, or access to funds when needed.

How Do You Pay Back a Reverse Mortgage?

There are a few options by which you can pay back your reverse mortgage loan: 

Repayment Upon Selling the Home

The loan is most often repaid when the homeowner sells the home. The proceeds from the sale are used to pay off the reverse mortgage balance, including any accumulated interest and fees. If there is any remaining equity after repayment, it goes to the homeowner or their heirs.

Repayment After the Borrower Passes Away

If the homeowner passes away, their heirs can repay the reverse mortgage by selling the home or using other assets to pay off the loan balance. If the home is sold and the proceeds exceed the amount owed, the remaining equity goes to the heirs. If the home’s value is less than the amount owed, heirs are not responsible for paying the difference as long as it’s a federally insured reverse mortgage (like a HECM).

Repayment After Moving Out Permanently

A reverse mortgage becomes due when the homeowner permanently moves out of the home, such as when they move into a long-term care facility. At that point, the loan must be repaid. Similar to the other scenarios, this is usually done by selling the home.

Voluntary Payments

Although reverse mortgages do not require monthly payments while the homeowner lives in the home, they have the option to make voluntary payments toward the loan balance. This can help reduce the overall debt or preserve more home equity for themselves or their heirs.

Reverse Mortgage Pros And Cons 

The major pros and cons of reverse mortgages include: 

Pros 

• It increases your retirement cash flow.
• You don’t have to leave your house, allowing you to age in place.
• A reverse mortgage will pay off your existing home loan.
• It has flexible repayment options. You can choose your payment amount and frequency.

Cons 

• It’s not free. The loan must be paid off after your death or when you move.
• It can reduce your government benefits.
• If you fail to pay insurance or property taxes, reverse mortgages carry the risk of foreclosure.